Trial seen as likely next step in Stockton bankruptcy

STOCKTON - It might not happen on the spot at today's court hearing, but a judge ultimately will rule that Stockton has made a good case for bankruptcy protection despite creditors' loud objections.

Scott Smith

STOCKTON - It might not happen on the spot at today's court hearing, but a judge ultimately will rule that Stockton has made a good case for bankruptcy protection despite creditors' loud objections.

That's the belief of attorney Michael Sweet, who has been closely monitoring Stockton's Chapter 9 case.

"Certainly, the city should have done things differently one year ago or five years ago," Sweet said. "It didn't."

At today's hearing, U.S. Bankruptcy Judge Christopher Klein of Sacramento will lead a discussion on what to do next to resolve the question of Stockton's eligibility.

A short trial lasting a few days is likely in the city's future, said Sweet, a partner at Fox Rothschild LLP.

Stockton filed on June 28, making it the nation's largest city to have sought Chapter 9 protection. Eight months later, the city has yet to overcome the first major hurdle - proving it is broke and did all it could to negotiate with creditors to avoid bankruptcy.

Before filing, Stockton engaged a long list of creditors in three months of mediation under a new state law called AB506. That forced Stockton to outline its finances and ask creditors to take losses on their investment into the city.

When that failed, city officials filed bankruptcy, arguing that under previous management, Stockton had overextended itself in debt and paid salaries and benefits that were too generous.

Its bookkeeping wasn't great either, City Manager Bob Deis has said.

Stockton's creditors, who stand to lose millions if Stockton prevails in bankruptcy, have mounted stiff challenges. Chief among them is Assured Guaranty Corp., which insured Stockton's bonds.

Assured Guaranty maintains that it is being asked to take a "hair cut," while the city didn't ask anything of California Public Employees' Retirement System, which manages the retirement pensions of city employees.

Stockton needs to tighten its belt and pay them in full rather than filing bankruptcy, Assured Guaranty further argues.

Sweet said that out of an abundance of caution, Judge Klein will likely set a trial to let the attorneys make their last-ditch arguments before making his ruling.

The trial will consist of attorneys cross-examining witnesses, Sweet said, adding that the city won't get its wish that Klein declare Stockton eligible for bankruptcy today.

"Given the weight of the issues," Sweet said, "I think it's unlikely that he just rules on it (immediately)."